U.S. Manufacturing Isn't Beating China But It's Not Doomed

(Bloomberg View) -- Everybody knows that there are fewer manufacturing jobs in the U.S. than there used to be. To be precise, there are 6.998 million fewer manufacturing jobs now than when employment in the sector hit its all-time high of 19.533 million in June 1979. Manufacturing's share of nonfarm payroll employment has dropped from a wartime peak of 38.8 percent in November 1943 to 8.5 percent now.

But as econowonks have a habit of pointing out whenever the state of manufacturing in the U.S. comes under discussion, as it has with President Donald Trump's pledge to impose stiff new tariffs on steel and aluminum imports, U.S. manufacturing output hasn't collapsed. In inflation-adjusted terms, in fact, it is more than twice what it was back in 1979, when manufacturing employment peaked.

The trajectory has admittedly gotten a lot flatter since 2000, and real manufacturing output still hasn't fully recovered from the last recession. There's also a big complication with these numbers, as economist Susan Houseman of the W.E. Upjohn Institute explained in 2016 (I wrote a column about this at the time):

1. Almost all of the real output gains in manufacturing in recent decades were driven by one sector: computer and electronics manufacturing.
2. The big gains in computer and electronics output were mostly the result of statistical adjustments to account for the rising quality of these products.

To elaborate on that second point, if a new computer has 15 percent more speed and memory than last year's model, then 100 new computers are counted as the equivalent of 115 of the previous year's model. As a result, wrote Houseman:

The rapid output growth in this industry does not necessarily imply that American factories are producing many more computers, semiconductors, and related products -- they may be producing less. Instead, it reflects the fact that the quality of the products produced is better than in the past.

Look at real manufacturing output for sectors other than computers and electronics, and the line is usually pretty flat. Here, for example, is raw steel output since 1972.

Steel production fell a lot in the mid-1970s, and even more in the early 1980s. Since then -- with the exception of that very sharp down-and-up during and after the last recession -- it has held remarkably steady. So the U.S. steel industry is not dwindling to nothing. It is, however, standing pretty much still as the economy around it keeps moving ahead. Which is true of manufacturing in general:

Part of what's going on here is that the manufacturing sector has gotten more and more efficient relative to the rest of the economy. The prices of manufactured goods haven't risen as fast as the prices of everything else (and in the case of computers and electronics they've fallen on a quality-adjusted basis), so manufacturing's share of GDP has dropped. A couple of Federal Reserve Bank of St. Louis economists argued in a blog post last year that manufacturing's share of real GDP, which has declined only slightly since the 1960s, is thus a better metric of its continued strength. But this runs into the computers and electronics issue described above, as well as warnings from the producers of GDP statistics at the Bureau of Economic Analysis that share-of-real-GDP calculations don't add up.  It is simply not credible to argue that manufacturing hasn't declined as a share of U.S. economic activity over the past half century.

That shrinking share of GDP is not necessarily a bad thing, or even evidence of decline. Manufacturing's share of GDP has been shrinking in China, too, even as China has overtaken the U.S. as the world's leading manufacturing nation.

The U.S. doesn't look terrible in this international comparison. Yes, China has leapt from also-ran to world's dominant manufacturing power in two decades. But the U.S. manufacturing sector has held its own in comparison with Germany since 1997 and gained ground on Japan. U.S. manufacturing is neither dwindling away nor booming. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

1. A couple of big exceptions are  apparel and leather goods manufacturing where real output is less than a quarter of what it was as recently as motor vehicle and parts manufacturing where it's up more than percent since and has more than doubled since the mid-1980s (this is partly due to quality adjustments similar to if less dramatic than those in computers and electronics).

2. The illustrious Brookings Institution economists Martin Baily and Barry Bosworth used the same metric in a 2014 paper in the Journal of Economic Perspectives.

3. That is, the chain-type price indexes used in real GDP calculations lead to situations in which the real value-addeds of the different sectors of the economy add up to more than real GDP.

To contact the author of this story: Justin Fox at justinfox@bloomberg.net.

To contact the editor responsible for this story: Brooke Sample at bsample1@bloomberg.net.

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